At the end of the first year of operations, 21,500 units remained in the finished goods inventory. The unit manufacturing costs during the year were as follows: Direct materials $30
Direct labor 18
Fixed factory overhead 22
Variable factory overhead 14

Required:
Determine the cost of the finished goods inventory reported on the balance sheet under (a) the absorption costing concept and (b) the variable costing concept.

Answer and Explanation:

The computation of the cost of the finished goods inventory reported is as follows:

Absorption costing is

= ($30  + $18 + $22 + $14) × 21,500 units

= $1,806,000

And,

Variable costing is

= ($30 + $18 + 14) × 21,500

= $1,333,000

In this way the cost of the finished goods inventory should be determined

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